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Using private forecasts to estimate the effects of monetary policy

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  • Thapar, Aditi

Abstract

I develop a methodology that uses the forecasts of market participants and of policy makers to estimate the effects of monetary policy on output and inflation. My approach has advantages over the standard practice of fitting a vector autoregression to the data. I apply my methodology to data on output, interest rates and prices. I find that, even using the Federal Reserve Board's Greenbook forecasts to control for the policy maker's information set, prices rise initially in response to a monetary contraction. This finding undermines the standard justification for including an index of commodity prices in VARs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 4 (May)
Pages: 806-824

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Handle: RePEc:eee:moneco:v:55:y:2008:i:4:p:806-824

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
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  3. Giordani, Paolo, 2004. "An alternative explanation of the price puzzle," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1271-1296, September.
  4. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  7. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  9. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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  11. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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  13. Hess Chung & Troy Davig & Eric Leeper, 2004. "Monetary and Fiscal Policy Switching," Computing in Economics and Finance 2004 325, Society for Computational Economics.
  14. Cochrane, John H., 1994. "Shocks," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 295-364, December.
  15. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
  16. Carlos Capistrán-Carmona, 2005. "Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious?," Computing in Economics and Finance 2005 127, Society for Computational Economics.
  17. Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
  18. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  19. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
  20. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
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Cited by:
  1. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
  2. Oscar Jorda, 2004. "Model-Free Impulse Responses," Working Papers 68, University of California, Davis, Department of Economics.
  3. Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.
  4. James D. Hamilton & Seth Pruitt & Scott Borger, 2010. "Estimating the Market-Perceived Monetary Policy Rule," NBER Working Papers 16412, National Bureau of Economic Research, Inc.
  5. Joshua D. Angrist & Òscar Jordà & Guido Kuersteiner, 2013. "Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited," NBER Working Papers 19355, National Bureau of Economic Research, Inc.
  6. Barakchian, S. Mahdi & Crowe, Christopher, 2013. "Monetary policy matters: Evidence from new shocks data," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 950-966.
  7. Christopher W. Crowe & S. Mahdi Barakchian, 2010. "Monetary Policy Matters," IMF Working Papers 10/230, International Monetary Fund.

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